Corporate Laws vs Ease Of Doing Business

Published on Thu, May 28,2015 | 22:23, Updated at Thu, May 28 at 22:27Source : Moneycontrol.com

By: Vinod Kothari & Nidhi Bothra, Vinod Kothari & Co

“Ease of doing business” (EODB) is a global concern, as with businesses have shown greater tendency to migrate to places which provide a more conducive, reasonable and transparent regulatory regime. India has lately shown tremendous concern to EODB as India’s position slid from 140 to 142[1]. While 140th position was bad enough, India is now worse to 142 and is in terms of ranking is below our neighbouring countries Pakistan, Nepal and Sri Lanka as well.

Ease of doing business is assessed by a group of domestic and international experts every year, and is reported by way of a “Doing Business” report which is issued every year[2]. The Doing Business Report carries out a survey evaluating and comparing quantitative indicators on business regulations and the property protection rights across 190 odd countries.

Concern For Ease Of Doing BusinessThe country has shown concern on the drop in the ranking of the country every year, which has an impact on how India is viewed in the global markets. The Prime Minister of the country has taken a very aggressive target to position India on the 50th position on ease of doing business ranking[3] and seemingly is a tall call looking at the urge to carry out impulsive law making, uprooting existing laws and economic scenario in the country beyond sentimental façade.

The Government of India has reportedly constituted a core group in the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion. There are several action points identified by the ministries to improve the business climate in the country.

Several measures have reportedly been taken which includes introduction of draft bankruptcy law, amendment to the Companies Act, 2013, in areas relating to construction permit, getting electricity, enforceability of contracts, trading across border, introduction of facilitating laws for small and medium scale industries etc.

Corporate Laws: Is There Any Ease Of Doing Business?The enactment of the Companies Act, 2013 was one of the most retrograde steps in recent years to regulation of incorporated business in India. While the basic framework for the Act was laid by committee of industry captains and corporate professionals headed by Dr J.J. Irani, the ultimate product came out to be a highly interventionist, compliance-heavy piece.

There were several reasons for this:• The Act was inspired by several recent corporate scandals. While the Satyam episode shaped the provisions in the Act pertaining to auditing, accounting and punishments, the Sahara episode pertaining to private placements formed the backdrop of regulatory pertaining to deposits and private placements, making even equity issues by private companies impractically procedure-driven. The Sharada chit fund scam in West Bengal had already come to surface when the rules pertaining to Deposits were being written – these rules resulted into deletion of exemptions for private companies from the Deposit Rules, leading to a very counter-intuitive law which treats deposits from relatives of directors, even in case of private companies to be “public” deposits.

• The legislation made the most basic mistake of leaving exemptions and carve-outs to a power of notification. This approach was there in the 1956 Act in case of specific classes – for example, government companies, not-for-profit companies, etc., but the most fundamental distinction in law is a case of private company, versus a public company. A private company is admittedly a private pool of capital, and as such, has no fundamental reason for a regulatory intervention. Even in case of private companies, the law left the exemptions to be notified by the MCA. While this process of exemption itself has taken longer than a year (not out at the time of writing this piece), the problem with the MCA giving exemptions is that as per temperament, bureaucrats are very bad in the act of “giving”. When they give 2, they take back 3. The exemptions, as per notifications placed before the Parliament, are far lesser than what they were under the 1956 Act, and are laden with conditionalities.

• The 2013 tried to borrow best of principles from jurisdictions around the world. For example, several concepts were borrowed from the UK listing rules, some from Sarbanes Oxley, and so on. While implementing these global best practices, we forgot that the number of listed companies in NYSE is just 1800-odd, the number of listed companies in India is 12000. The average size of Indian listed company is 1/80th of an NYSE-listed company. Some provisions, picked up from the NYSE listing rules, are applied even to public companies, which may not be listed at all, merely on the criteria of turnover and/ or capital. The net result of this is one of the most aggressive and context-insensitive laws which applies non-commensurate provisions to closely-held companies.

• Huge amount of law-making was left to the MCA. Lot of rules were left to be framed even by bodies such as ICSI in form of the so-called “secretarial standards”. As these rules are rolling out, one notices quite substantive law being made both by the MCA and by the standard-setters.

Foreign-Owned Companies – Impracticalities Arising Out Of The LawIf the Prime Minister’s “Make in India” campaign is to attract global businesses to come and use India as a manufacturing hub, the Companies Act is serving as a major obstacle.

We need to realise a few things at the very threshold:• For any global business, the corporate form is the only form of initiating business in India, since FDI is allowed under the “automatic” route only in case of companies. Hence, for any global business, whether coming to India to make in India, or sell in India, the only obvious choice is the company form.

• Most of the so-called foreign-owned-or-controlled companies (FOCCs) are private companies. They are, in most cases, wholly owned subsidiaries of their global parents.

• Being private companies, they were exempt from lots of requirements of the law under the 1956 regime. Under the 2013 Act, as most of the exemptions have been withdrawn, FOCCs are at par any other tightly regulated company.

• One of the most weird requirements is that an FOCC will have to do its AGM in India. This was the rule under the 1956 Act too, but in era of technology, sounded archaic. On top of this rule, Rule 18 (3) (ix) of Companies (Management and Administration) Rules, 2014, brought a new rule that was never heard in 6 decades of corporate meetings in India – it said even extraordinary general meetings (EGMs) cannot be held outside India. The rule is being made stronger by Secretarial Standard 2. One needs to realise that there are tens-of-thousands of FOCCs in the country. Their shareholding is entirely out of India. Imagine a meeting for passing a resolution for issue of shares to the holding company – the shareholders will have to travel thousands of miles to do a perfunctory meeting. Is this contributing to the ease of doing business in India? All the more, was there any concern arising from corporate experience of 6 decades that the power to call EGMs outside India has been misused? Or even if a company feels that the power can be misused, the company may self-regulate itself by its articles and lay a restraint there. The issue is, why would the law ordain companies necessarily to send their shareholders all the way to India to hold meetings here?

Unresolved Issues, Resolutions AboundThe new law has brought in several unresolved issues, which is very evident from the 3 dozen clarifications already issued by the MCA. However, what is very clear is that the lawmakers aggressively went about seeking board resolutions, general meeting resolutions, resolutions by special majority, etc, whole hog.

For example special resolutions, which was an exceptional requirement under the 1956 Act evident by the word “special” is now being sought in almost 377 matters. In cases which are fairly routine and did not require any need to go to the shareholders, such as issue of debentures by the companies, the law now requires getting a special resolution. There are some 15 items where resolutions in board meeting are now needed – this number of gone up from 5 as per the 1956 Act.

In short, the law is laden with new formalities and compliance requirements.

ConclusionAmong all other things that are important for making the environment in India conducive for doing business, the Companies Act is the most important piece of law facilitating doability of business and applicability of regulations with regard to the corporate sector. The passage of Companies Act, 2013 was with the intent of providing the corporate sector with a facilitating law which would be conducive to the present business scenario. However it does not seem like the Act, 2013 has been anywhere close to achieving its purpose with a clear wave of de-corporatization growing in the country. Statistics indicate that in the financial year 2014-15 there is a 35% fall in new company formation over last year and an 85% rise in incorporation of limited liability partnerships (LLPs) in the country purely with the intent to remain light on the regulatory scanner applicable to LLPs[4].

There has been an attempt to amend the Act, 2013 and the Parliament has passed The Companies (Amendment) Act, 2015[5]. The intent of the amendment was with the intent to bring about the ease in doing business. However there seems to a basic disconnect between what the industry aspires for achieving ease in doing business versus what the law makers are providing in the offing. One, moving the Parliament for an amendment to an Act is not an easy affair and cannot be achieved with great ease; which means that substantial deliberation should have been carried out to understand the gravity of the amendment required and its implication. Second, the Amendment Act of 2015 has also offered piecemeal amendment and include items like doing away with the requirement of common seal, which the authors believes that really was not a bottleneck to the mission at hand. Third, the law is full of such bottlenecks and larger issues that need attention sooner than later.

In the author’s opinion, if the vision of the country and of the Prime Minister is to promote Make in India campaign and make business easy in India, the focus should be ironing out the issues prevailing currently due to change in regulatory scenario and curb impulsive law making practices rampant in the country in currently.